This is another of those stories from Japan that suggests implications about Korea. In this case, we learn of the hazards of corrupt and/or incompetent local boards of directors putting foreign executives into C-level positions. While we have seen this practice work in the automotive industries at Nissan and GM Daewoo, elsewhere the results have been questionable such as at Sony and LG Electronics.
In Korea, the “safest” and most common approach is to parachute in non-Korean-speaking executives and then deny them real authority by intent or neglect. After a couple of years, the foreign executives move on to other companies without any real harm or good being done, other than assuring that all relevant English communications to the outside world have educated, native English quality.
What separates Japan from Korea is that many foreign business professionals in Japan do speak and read Japanese. At least conversationally, Japanese is much easier and enjoyable than trying to learn Korean. So much so, it is now expected of most serious Japan-based business professionals to be able to carry on a business conversation in Japanese. Not so in Korea, except in the case of ethnic Korean foreigners. And in the case of the latter,their Korean is often disappointingly inadequate compared to that of native Koreans, or in a few cases, they get so caught in the Korean web of obligations that they compromise their integrity.
In other words, there is less chance of what happened at Olympus will happen in Korea. But this is not to say it couldn’t or won’t happen. The conditions are at least as ripe for disclosure in Korea as in Japan. And it may well be just a matter of time until a foreign executives blows the roof off of a major Korean company.
As Asian corporations continue to become more internationalized, hidden dirty practices are more likely to be disclosed. For that reason alone, it is worthwhile to read the below, fascinating account by Terrie Lloyd, a highly-regarded authority on doing business in Japan.
Following the article, Coyner’s Comment resumes, featuring comments by two very experienced western executives with decades of Asian experience who make some important points about the matter.
Roller Coaster of Olympus Meltdown
October 23, 2011
An amazing story is unfolding before us here in Japan involving over a billion dollars of potential fraud. At the heart of the scandal is an autocratic Chairman, who may or may not have bilked investors in his public company of that huge sum. The company we’re referring to is Olympus, and the ruler of that fiefdom is Tsuyoshi Kikukawa.
The way the events have unfolded, well you couldn’t write a better fiction novel.
Olympus was founded in 1919 and early on in its existence decided that microscopes and scientific optical gear would be its domain. It’s had a number of corporate captains since the passing of the founders and the current one is Chairman Kikukawa. He is a product of Japan’s golden age, entering Olympus straight out of law school in 1964 and rising gradually through the ranks until he was running the show in 1998. Around him are similar directors and managers, all of whom are loyal and eager to please, and like their boss they have mostly risen up through the ranks by being generalists and playing the corporate game well.
In 2006, Kikukawa realized that the Japanese domestic market was grinding to a halt, dragged down by politics and a declining economy, so he contacted an acquaintance named Hajime ‘Jim’ Sagawa, an ex-Nomura banker living in New York since 1980, to start looking for foreign acquisitions.
Sagawa apparently quickly identified Britain’s Gyrus as a takeover target and Olympus bought the company in 2008 for the impressive sum of US$2.2bn. Sagawa appears to have had two companies involved in taking commissions from the Gyrus deal, one, AXES in New York, which received a modest fee income of US$7m, and the other AXAM, which eventually received US$620m and was based in the Cayman Islands, well outside the reach of the U.S. taxman. AXAM was de-registered shortly after the transactions were completed. How convenient.
After acquiring Gyrus, a major company in its own right, Kikukawa got to see how a top-rank western company is run and no doubt realized that the future lay in competitive practices that relied less on corporate politics and more on information, cost-control processes, and IT. To make sure that the acquisition went well, he offered a rising star in the Olympus Europe business, Michael Woodford, a senior position in Japan. Woodford quickly settled into the new position, and within 6 months, Kikukawa had kicked himself upstairs (to Chairman) and installed Woodford as CEO.
What Kikukawa hadn’t counted on, however, was the fact that he was hiring a tiger into his team of Tokyo-based donkeys — hard-working donkeys, yes, but in the end men who would say yes when required to. Woodford, though, was the product of a cut-throat corporate culture in Europe, and upon landing the top job at Olympus Head Office apparently started setting about making sure that his position was secure from outside (or inside) attack. From what Woodford says, it very quickly became clear to him that not only was there a lack of competency in the senior management on the board, but that some troubling financial transactions had occurred as well.
He started digging, bringing in PwC to audit the transactions, and what he found shocked him enough that he must have realized he was sitting on a powder keg and had better cover his back. Survivor that he is, he moved quickly and confronted Kikukawa and the Olympus board with the evidence. It was a personal broadside they couldn’t handle, perhaps because they were involved in the fraud or perhaps because they realized they would be cast as being incredibly incompetent. Either way, Woodford’s evidence would cost them their jobs. So they moved first and unanimously fired Woodford for “not understanding the necessity of drawing on the corporate and Japanese culture in running the business.”
But you don’t want to corner a tiger, and what they didn’t know is that Woodford had plenty of resources to fight back, including the smartest move of all — he went to the Serious Fraud Office in the UK, since the Gyrus acquisition happened there, and provided evidence of suspicious payments between Olympus and the advisors of the Gyrus deal. We’re not talking about the typical 1%-2% fees that most brokers would receive on a US$2.2bn transaction, but instead a whopping 30% — which Reuters has since reported is the largest M&A fee ever made anywhere! As a point of contrast, the largest fee paid up until then was a US$217m commission paid by RFS Holdings (Royal Bank of Scotland) for a EUR70bn takeover of ABN AMRO in 2007. Puts things into perspective doesn’t it?
Woodford also found out about 3 other unusual and hugely expensive transactions here in Japan as well, which we believe pretty much prove that Kikukawa and co. were up to something shady. PwC found out that Olympus had paid about JPY80bn (at that time around US$773m) for 3 tiny, privately held companies in Japan, which between them weren’t making more than JPY3bn in revenues and which were in areas totally unrelated to the Olympus core business. Just the year after the three deals were done, Olympus quietly wrote down the purchases by more than 70%, or around US$586m in impairment losses.
It is unbelievable that the management of such a major public company would make such terrible purchasing decisions repeatedly and allow themselves to lose such a huge amount of company money. One mistake could be considered incompetence, but four times running implies something much more suspicious and deliberate. No one knows at this stage whether Kikukawa was the beneficiary of these deals or not, but as the old saying goes, “follow the money”. Now that the British SFO is on the case, the Japanese financial authorities really have no choice but to take up the matter and we think this will most likely wind up with Kikukawa at least being charged with negligence and being deposed from the company.
What is most disturbing is that if there wasn’t a foreign transaction, and if no foreigners had been involved in the deal, then the Olympus scandal probably would have never seen the light of day. Kikukawa “owns” the Olympus board, with only 3 outside directors, and at least one of them a personal friend, it is unlikely that they would have challenged the Big Boss over the losses. Indeed, they never did challenge him in the 3 years following Gyrus and the other losses.
In the longer term, this episode also means that hiring a senior foreigner into a major Japanese company can spell big trouble for existing management. Transgressions can no longer be kept in the family when there are prying outsiders looking at the books, and so the potential for things to blow up increases dramatically. We believe that Japanese firms who might have been thinking to promote foreigners up through the ranks will be watching the Olympus scandal with trepidation and will be pulling back from any hiring plans they may have had.
The reader who commented in TT-634 last week about a certain major Japanese investment bank that has similar “sacred cows” and entrenched management cliques, has turned out to be very prescient.
Terrie Lloyd’s report on the Olympus scandal generated several comments from KER subscribers. With their permission, I’m forwarding two KER subscribers’ comments, both of whom have each worked decades in NE Asia, without attribution as they requested:
“Very well said,Tom. The Olympus situation is staggering and shows the state of corporate governance in Japan. As to Korea, the chaebol and their founding families provide us with regular fodder of a similar type, but it would take an astute foreigner to become involved in the inner circle and be in a position to blow his whistle. As to not speaking Korean, as one who doesn’t, it enables a foreigner to maintain his objectivity and not become immersed in the detail.
In my experience, Koreans prefer to deal with people they know and trust, ie, those from their region of Korea or who went to the same school or college, and foreigners are on the outside edge of the average Korean comfort zone.”
“Great article by Terrie Lloyd. Thanks for forwarding it.
“A couple of days ago, I posted the following on someone else’s Facebook entry that mentioned Olympus.
“Some years ago I served on the Board of a listed Japanese company as an outside Director and Chairman of the Audit Committee. We identified some problems involving fellow Directors. Instead of bringing this up at a board meeting, I spent days talking informally with some of the key directors/executives and then we had several all-day meetings involving these directors and brought in our outside securities council for advice. This enabled us to create the consensus that allowed us to act: “quietly” asking the Directors involved to resign although ultimately we had to report the key point to the SEC. Major changes can be made in Japan but not through direct confrontation.
“The company involved had an Over The Counter USA listed subsidiary that had to meet SEC reporting requirements.
“Two Directors, one the CEO of one of the largest and most profitable subsidiaries and the other the second largest shareholders of the parent company got involved in a transaction that violated both Japanese and US Law. I first approached the CEO who, when he realized his possible personal liability, used me to spearhead the removal these two directors. It took 5 trips to Japan, within three months to accomplish this. Of course it got highly emotional , calling on long time relationships, etc. but we somehow were able to maintain Wa [sic: harmony].”